Cottee discipline gets Nexus out of a jam

Almost six months into his reign as chief executive of the once-stricken oil and gas play
Nexus Energy
, Richard Cottee can claim success on at least one front.

Nexus shares have more than ­doubled under his watch, providing much needed relief to long-term shareholders and vindicating the decisions of the Cottee disciples who followed the former Queensland Gas Co chief into his new venture.

“It’s that Mark Twainism: the reports of Nexus’s death are greatly exaggerated," Cottee says of the two years of financial travails. “And I’m looking forward to the afterlife."

But there remains a huge amount of work to do at Nexus, and it wasn’t the lure of financial riches that attracted him to the job.

The sale of QGC, the company he had built from cash-strapped minnow into coal seam gas giant at the time of its $5.3 billion sale to England’s BG in 2008, left Cottee financially secure.

It was the appetite for being back in corporate life, building something, that drew him into the job. And if it was challenges he was after, Nexus had an abundance of them.

It had spent the best part of two years flirting with death, having been hit by the global financial crisis just as it was pumping cash into its maiden production development – the Longtom gas field off Victoria – and trying to complete the crucial sale of a stake in its Crux condensate project in the Timor Sea.

Nexus’s already precarious final position was exacerbated shortly after Cottee’s appointment, when gas from the freshly commissioned Longtom project was found to contain unacceptably high volumes of mercury. Having limped to the verge of cash flow, Nexus was forced to wait again as mercury removal equipment was fitted to the project.

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After a five-month wait, Longtom is now finally back in production, with the first cheques set to arrive early next month. Along the way, ­Cottee has carved 23 per cent out of the company’s overheads and administration costs as well as paid for the mercury solution without raising any equity.

The share price run of recent months, – including a 30 per cent gain in the space of a week earlier this month – is the best reflection of the improved standing and reputation Nexus enjoys under Cottee.

“The sense I’m getting from the analysts and brokers is, ‘well obviously there’s now real discipline back at Nexus’," he says. “We’ve been able to go six months now without any cash flow without any fund-raising, so imagine what we’re going to do now we’re back in cash flow."

Cottee’s appointment to Nexus is something of a homecoming to the conventional oil and gas industry.

A lawyer by training, Cottee’s first job outside the legal profession was a commercial position with Santos. He is also a former chief executive of Queensland’s CS Energy, and prior to joining QGC was the managing director of NRG Energy in London.

While Nexus is most certainly a challenging appointment, Cottee is by no means unused to those. His time in London was cut short by redundancy, sending him back to Australia with his family, unemployed.

QGC was a minnow when he joined. The then cash-strapped company was bogged down in legal disputes and boasted a market capitalisation of only $20 million.

He succeeded in those conditions, and is certainly backing himself to succeed again with Nexus.

The key challenge facing him today is finding an outcome on Nexus’s Crux project. Under a complicated ownership structure, Nexus has the rights to the condensate in the field while Royal Dutch Shell owns the gas. Combining the two sets of rights would greatly enhance the economics of Crux and make it increasingly attractive for one of Shell’s under-development floating liquefied natural gas (FLNG) vessels. The logic of a tie-up has meant Nexus has never been far from takeover speculation.

Cottee says that while the company has not been approached, “we are on red alert; we have to be in these situations".

He believes the financial stability finally returning to Nexus means “the timing is right" for a solution at Crux. “I think it’s in Shell’s interest to pursue that solution and clearly Nexus would like it to happen, but it is no longer in the position that it is desperate for that to happen because it’s the only route to salvation," he says.

“Clearly we can survive without [a deal]. Once you end up in a position where both parties would like something to happen, but neither perceives the other’s desperate, that’s where you can get the appropriate outcomes."

Scott Ashton, an analyst at stockbroking group BBY, has calculated that a deal under which Crux becomes part of a FLNG project could ultimately be worth $1.51 a share to Nexus, ­compared with its current share price of 47¢.

Beyond a deal with Shell, Nexus is also actively pursuing plans to develop Crux on its own.

“We are in detailed discussions with our preferred contractor and hopefully by next month we’ll be able to announce that’s been put to bed," Cottee said.

In addition, the company is “a long way down the track" with financing for the development.

Cottee is no stranger to big deals – he led a series of takeovers during his time at QGC before engineering the sale to BG – and locking horns with Shell would be a big test of his experience. Either way, his record to date seems to have left him with plenty of backers.

He says that on a recent roadshow to New York, one fund manager unveiled a calculation that found a $22,000 investment in QGC at the time of Cottee’s joining in 2002, stashed under a mattress after the BG sale and then pumped into Nexus after his appointment, would now be worth $1 million.